medium · Frm Part 2 Liquidity & Treasury Risk
In liquidity risk management, 'asset encumbrance' is a critical metric because pledged assets:
- Increase the bank's Net Stable Funding Ratio by providing secured cash.
- Reduce the credit risk of the bank by ensuring depositors are paid first.
- Cannot be used as counterbalancing capacity to meet outflows in a stress test.
- Are automatically classified as Level 1 HQLA regardless of their credit quality.
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